Sucheta Dalal :Tax evasion: What HSBC really did
Sucheta Dalal

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Tax evasion: What HSBC really did  

May 16, 2011

The British bank lured greedy US-based Indians with schemes that would help them avoid paying US taxes

Sucheta Dalal

The dubious role of HSBC’s (Hongkong and Shanghai Banking Corporation) managers in luring greedy Indian-Americans to dodge US taxes has been virtually buried by the Indian media—probably because HSBC happens to be a huge advertiser. So, while noting its official statement that “HSBC does not condone tax evasion and is cooperating with law enforcement in this matter,” let’s look at what exactly the US Internal Revenue Service (IRS) has alleged.

Vaibhav Dahake, an Indian who became a US citizen in 2006, pleaded guilty to dodging US taxes on bank accounts that he maintained in India. US laws require its citizens to disclose any account of $10,000 (and above) and any income above $10 earned on it. Why was Mr Dahake foolish enough to believe that he would get away? In his guilty plea, he has described how it all started with an unsolicited approach from the Bank’s NRI Services Centre at New York. It spoke of high interest rates on bank deposits in India. Once they had Mr Dahake on the line, the officials encouraged him to maintain undeclared accounts in the British Virgin Islands and India (at Thane). He did so from 2001 to 2010 before getting caught.

Mr Dahake told US authorities that the bank managers assured him that he did not have to provide his social security number or fill out any declaration forms. They also assured him that HSBC would not report income from the accounts to the US authorities. The real mischief stems from the fact that it was the bankers who laid out the modus operandi of dodging the US tax system. They asked him to wire multiple cheques of $10,000 to ‘stay below the radar’ of the IRS. Further, he was advised that he must wire funds out of the US by first converting them into other currencies; the bank managers assured him that the fund transfer would not be routed through the US banking system.

It had further advice on how to fly below the IRS radar, to take money back to the US. HSBC had access to Mr Dahake’s Mumbai account through a formal consent from which it offered to issue him cheques of $9,500 each. It also warned that he ought to withdraw just $2,000 at a time and carry some of the money in travellers’ cheques to avoid detection by the Reserve Bank of India as well. That is why the US lawsuit names HSBC managers at Thane and New York as co-conspirators and not defendants. Given how well-oiled the operation was, it is hard to believe that these were rogue managers acting on their own to help customers beat the law. That is probably why HSBC swiftly shut down its two NRI Service Centres in the US. At the time of going to press, Josephine Bhasin, another HSBC client in New York, had pleaded guilty to dodging taxes on $8.30 million. The New Jersey court documents in Mr Dahake’s case make it clear why the IRS feels confident about finding a few thousand Dahakes at HSBC alone. 

(This article first appeared in the edition of Moneylife magazine, dated 5 May 2011 that was available on the newsstands on 21 April 2011.) 

-- Sucheta Dalal